Question

A project is expected to generate a cash flow of $3,000 in year 1, $1,000 in year 2, and $5000 in year 3. At an interest rate of 11%, what is the maximum amount that you could invest in the project at year 0?

Answer 1

maximum amount = 7,170.28‬

Step-by-step explanation:

We will calculate using the present value of a lump sum

`(Principal)/((1 + rate)^(time) ) = PV`

For year 1

Principal 3,000.00

time 1.00

rate 0.11

`(3000)/((1 + 0.11)^(1) ) = PV`

PV 2,702.70

For year 2

Maturity 1,000.00

time 2.00

rate 0.11

`(1000)/((1 + 0.11)^(2) ) = PV`

PV 811.62

For year 3

Maturity 5,000.00

time 3.00

rate 0.11

`(5000)/((1 + 0.11)^(3) ) = PV`

PV 3,655.96

We add them to get the present value ofthe cash flow

3,655.96 + 811.62 + 2,702.70 = 7,170.28‬

This will be the maximun amount we can pay for the investment at our current rate. more than this sum will generate a negative net present value